Here's Why D & O Green Technologies Berhad (KLSE:D&O) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, D & O Green Technologies Berhad (KLSE:D&O) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for D & O Green Technologies Berhad

How Much Debt Does D & O Green Technologies Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2021 D & O Green Technologies Berhad had debt of RM142.9m, up from RM105.3m in one year. However, it also had RM97.1m in cash, and so its net debt is RM45.8m.

A Look At D & O Green Technologies Berhad's Liabilities

We can see from the most recent balance sheet that D & O Green Technologies Berhad had liabilities of RM304.2m falling due within a year, and liabilities of RM73.4m due beyond that. Offsetting these obligations, it had cash of RM97.1m as well as receivables valued at RM170.1m due within 12 months. So it has liabilities totalling RM110.3m more than its cash and near-term receivables, combined.

Having regard to D & O Green Technologies Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the RM9.56b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, D & O Green Technologies Berhad has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

D & O Green Technologies Berhad has net debt of just 0.21 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So there's no doubt this company can take on debt while staying cool as a cucumber. Better yet, D & O Green Technologies Berhad grew its EBIT by 117% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine D & O Green Technologies Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, D & O Green Technologies Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Happily, D & O Green Technologies Berhad's impressive interest cover implies it has the upper hand on its debt. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. When we consider the range of factors above, it looks like D & O Green Technologies Berhad is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for D & O Green Technologies Berhad you should be aware of, and 1 of them is a bit unpleasant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.